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ETF Strategies to Beat Likely "Hyperinflation" in the World

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Inflation has been on an uphill ride this year thanks to the low-base effects from 2020. Also, because economic recovery has picked up on widespread vaccination and fiscal stimulus, business restrictions have been relaxed and demand has jumped.

The annual inflation rate in the United States rose to a 13-year high of 5.4% in September 2021 from 5.3% in August and above market expectations of 5.3%. Faster price increases were recorded in cost of shelter (3.2% vs. 2.8% in August); food (4.6% vs. 3.7%, the highest since December of 2011), namely food at home (4.5% vs. 3%); new vehicles (8.7% vs. 7.6%); and energy (24.8% vs. 25%), per trading economics.

Twitter co-founder Jack Dorsey recently put stress on escalating U.S. inflation, saying things are going to get considerably worse. “Hyperinflation is going to change everything,” Dorsey tweeted lately, as quoted on CNBC. HSBC Asset Management has also recognized that rising inflation is one of the factors forming the current “wall of worry” faced by global markets, as quoted on CNBC.

The consensus forecasts for U.S. 2021 GDP have been reduced by 0.7 percentage points to 5.9%, according to HSBC’s aggregate. On the other hand, supply chain issues have boosted U.S. 2021 inflation expectations by a full percentage point to 4.3%.

Against this backdrop, we suggest a few ETF strategies that can be worth investing at the time of rising inflation. Below we highlight those.

Bet on Value ETFs

Higher inflation may goad the Fed to raise rates. Rising rates are good for value stocks than the growth ones as the latter’s cash flows come way out in the future, as indicated by New York University finance professor Aswath Damodaran, as quoted on CNBC. Vanguard Value ETF (VTV - Free Report) is thus a good bet.

Energy Sector a Likely Winner?

The energy sector tends to perform well in an inflationary environment. The revenues of energy stocks are dependent on energy prices, a key factor of the inflation indices. Such firms surpassed inflation 71% of the time within a time span of 1973-2020 and delivered an annual real return of 9.0% per year on average.

The operating backdrop of the sector too is bullish. Oil price has been on a tear with Brent hitting the highest level not seen since 2014. The rally has been driven by supply disruptions and storage drawdowns as well as growing demand with the easing of pandemic restrictions. VanEck Vectors Unconventional Oil & Gas ETF could be good play out here.

Own Real Estate

Warren Buffett also suggests owning real estate during periods of inflation because the purchase is a “one-time outlay” for the investor, does not incur recurring costs and involves resale value. In a rising-inflation environment, real estate stocks act as good bets. Both, resale value of the property and rental income, rise with price inflation (read: Follow Buffett With These Inflation-Friendly ETF Strategies).

Thanks to rising home prices, affordability is falling. Demand for renting has been increasing, which in turn is giving a push to shelter costs. This means exposure to real estate could be inflation-beating. Notably, equity REITs outperformed inflation 67% of the time and offered an average real return of 4.7%.

Some of the decent real estate ETF plays right now are Real Estate Select Sector SPDR ETF (XLRE - Free Report) and U.S. Diversified Real Estate ETF (PPTY - Free Report) .

Play Inflation-Protected ETFs

Thanks to the growing reach of the ETF industry, we now have several ETFs that offer exposure to tackle inflationary pressure. These ETFs are ProShares Inflation Expectations ETF (RINF - Free Report) , Horizon Kinetics Inflation Beneficiaries ETF (INFL - Free Report)  and Quadratic Interest Rate Volatility and Inflation ETF (IVOL - Free Report) .

TIPS ETFs like iShares TIPS Bond ETF (TIP - Free Report) also look to be great bets. These offer exposure to U.S. TIPS, which are government bonds whose face value rises with inflation. TIPS ETFs offer robust real returns during inflationary periods unlike their unprotected peers in the fixed-income world.

Time for Asian Fixed Income?

HSBC Asset Management Global Chief Global Strategist Joe indicated that Asian fixed income assets are “reasonably priced inflation hedges,” as quoted on CNBC. VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC - Free Report) is one of the emerging market bond ETFs that yields more than 5% at present. China (10.36%), Indonesia (9.61%), Thailand (6.41%) and Malaysia (6.15%) take about one-third assets of the fund.